Bank accounts will provide more financial stability to the poor

One of the major highlights of PM Narendra Modi Independence Day speech was the plan to roll out bank accounts for the poor packaged together with a debit card and an insurance policy of Rs 1 lakh under a new program called the Pradhanmantri Jan-Dan Yojana. And the prime minister also promised that he will also take steps to ensure that every poor person will be able to operate his bank account through his mobile.

This is a follow up on the budget speech made by finance minister Arun Jaitley to provide banking services for all people. The idea is to ensure that each family would have at least two bank accounts and to ensure that they also become eligible for bank credit. Such inclusive banking would give a big boost to the financial inclusion agenda which is now becoming an important tool for alleviating poverty at the global level. In fact most recent studies show that an overwhelming majority of the countries across the globe are pursuing financial inclusion agendas of one form or another.

The NDA government efforts to ensure bank accounts for all household is a major step up over the UPA government efforts to provide Aadhar numbers to ensure direct cash transfers for making payments to beneficiaries under the various government welfare schemes. Bank accounts will ensure not only a point for transferring funds to beneficiaries but also provide an avenue for mobilizing savings and availing credit to ensure greater financial stability to the poor.

Ensuring bank accounts to all households is a herculean task that will require use of innovative mechanisms and institutions both to extend the reach of the banking sector and to ensure protection of the savings of millions of new depositors. Numbers over the last decade show that though the number of households having bank accounts have more than doubled from 6.82 crore in 2001 to 14.48 crore in 2011 the share of households having bank accounts have gone up only marginally from 35.54% to 58.70 percent in 2011.

Providing new accounts for almost 40% of the households who currently have no such accounts and are in the lowest income groups is a challenge that the government and central bank has to jointly tackle. However, one thing that will now come to the aid of the NDA government is the technological changes which now enable operation of bank accounts through mobile phones.

And the recent policies announced by the RBI to allow niche banks like payment banks, which offers only restricted services, and small banks, which will limit themselves to specific locations, will also be of major help in extending bank accounts to more households. This is especially so because the new licensing policies will allow non banking finance companies, public sector and cooperative entities, super market chains and mobile companies to provide limited banking services.

So while the new inclusive banking policies of the NDA are technologically feasible the challenge would be to ensure that rivalries between different institutions and even departments, that the prime minister has touched up in his address to the nation, does not hamper the quick roll out of the program. The government should also ensure that the RBI keeps to its promise to allow bank licenses on tap so that the larger competition in the banking sector will ensure that the new players will reach out to provide accounts to all households across the country. It is certainly a win win game that will bring in gains all round.